Friday, October 23, 2009

Look,It's Someone Doing Their Job!

The New York Times today reported a story about Dr. Suzanne Stratton, a Ph.D. molecular biologist and researcher in clinical oncology, who was brought in to oversee the quality of clinical trials at Carle Cancer Center in Urbana, IL. Upon taking up her position, Dr. Stratton finds, among other issues, failures to properly consent patients in cancer trials. In the world of clinical studies, this is a major "No No." In addition to opening up the institution to considerable liability if, let's say, the patient died due to an experimental treatment that was not properly explained, that patient should also properly be taken out of the enrollment pool for the study because of the failure to properly document informed consent.

It sounds like Dr. Stratton had done her job and found this fundamental violation of good clinical practice, and had pointed it out to her superiors, along with other issues. For this, she was discharged and led out of the office the same day. In the mean time, it turns out that one Principal Investigator at Carle, Dr. Ken Rowland, "has simultaneously overseen more than 130 clinical trials in more than 20 cancer types, ..., and he personally enrolled about one-quarter of the 500 patients Carle signed up for experimental treatment in a typical year." This is analogous to a lawyer billing 5,000 hours a year--implausible to say the least.

This kind of high volume throughput does lead, just like in the financial world, to moral hazard and perverse incentives. In fact, the NYT article suggests that "doctors too often promoted trial treatments as superior to standard approaches, even when there was no supporting evidence."
Get 'em in and get 'em enrolled, and let's bill the Government based on enrollment. The primary body for regulatory oversight in this setting is the Institutional Review Board (IRB), and Dr. Stratton had the temerity to suggest that it was too deferential to researchers and did not maintain its own, independent documentation.

Kudos to Dr. Stratton for doing what she was supposed to do and for following the chain of command and for calling it like she saw it.

Monday, October 19, 2009


An interesting item came across my desktop from Richard Herring, Professor of Finance at the Wharton School. He notes that "the 16 largest financial institutions control 2.5 times as many subsidiaries as the 16 largest non-financial firms. One of the most complex financial firms controls 2,435 subsidiaries, half of them chartered in other countries. Many such subsidiaries are formed to "minimize regulatory burdens" or reduce tax bills," he says. "Such complexity makes it difficult for anyone -- including regulators and the companies' own managers and directors -- to fully understand all the risks the firms are taking, or how those risks might interact with ones other companies are taking."

Here are some thoughts. Let's simplify a tax system that encourages and allows such non-productive activity like creating a network of 2,435 subsidiaries whose purpose is to transfer income from the Treasury to management and shareholders. Second, having just spent some time with a few directors of large financial services company, I hate to say, and I include myself, that they would be hard pressed to find pockets of radioactive risk inside of a corporate rabbit warren like the one Professor Herring cites. Unfortunately, in the case of TBTF financial institution, the directors failure soon becomes a taxpayer burden, and this chain also needs to be broken by sensible, basic regulation.

Conscience and Character

What do these have to do with the crisis of the American financial system? Nothing. And, that's exactly the problem. Wall Street fosters an environment where a person's governor or self-regulator, called a conscience is switched to "Off" during office hours. The name of the game is always to go to the edge, and over the edge. If someone calls you on it, pull back, with no consequence and go about your business. Each minute, hour, day, and quarter is serially independent of any other. "Size of the book" is all that matters, and the positive or negative sign means little. Size means you're a player, and a negative sign means that you are "aggressive."

Unfortunately, a variation of this theme applied to bank regulation during the build up to the crisis. That truth is slowly coming out. Here's a self-assessment of the Federal Deposit Insurance Corporation's loan review process reported on the Calculated Risk blog:

"The FDIC’s Office of Inspector General analyzed 23 lenders taken over by regulators from August 2008 to March and found that for 20, the agency’s examiners didn’t identify the issue early enough or should have taken stronger supervisory action after recognizing the banks had dangerously high levels of the loans before they failed. ...“It’s often we’ll see in our reports that the FDIC detected problems in the bank in a timely fashion, but in some cases forceful corrective action wasn’t required by the FDIC to be taken quickly enough,” Jon Rymer, the FDIC’s inspector general, said in a telephone interview." (Source: Calculated Risk)

So, it's not a matter of inadequate process or regulation. Examiners were in place, and they went out and followed their processes, which pointed out the issues. What is unclear is why the levels of bad loans were allowed to get so high, and why "forceful corrective action" wasn't taken. It's the same issue: a failure of character and faithfulness to one's mission. Of course, having worked for a few agencies of the Federal government, it's easy to construct a scenario where an examiner calling for shutting down lending in a go-go market in a "free market" administration might not think this was a good career move. And that's a shame.

I've never responded negatively to one of my staff giving me bad news or taking a stand on something. Overzealousness shows passion and commitment; it can always be remodulated, if it has to be. Failing to call attention to a problem or being inhibited about bad news is a more complex problem; it's being tepid, which is a bad thing in sports, life and in the world of character and conscience.

Reverend Dr. Martin Luther King, Jr. longed for the day when a man would be judged "not by the color of his skin, but by the content of his character." Perhaps the latter is something that should start going onto performance review forms.

Monday, October 12, 2009

Silence in Islamabad

The recent brazen Taliban attacks on Pakistani military headquarters, the killing of international civilian food program officials, and the taking of hostages has been greeted by a very muted public response from the government of Pakistan. Normally, the head of state would be issuing press releases to the worldwide community, flanked by the top generals, expressing outrage and a program for reestablishing security and punishing the organizers. The most publicly quoted international official has been Secretary of State Hillary Rodham Clinton!

If I were sitting in New Delhi, I would be very worried as well, because there is no real benefit to India from a collapse of the Pakistani state, but it seems as if there are messages being sent by the Pakistani Taliban, paraphrasing Alexander Haig's famous quote, "(We're) in charge now." No targets are off limits, and that includes employees of international agencies, who had traditionally been given safe passage to do their humanitarian work. The international community has also been challenged, and there is no response. I'm not sure what it could be, but unfortunately President Obama's choices in Afghanistan will ultimately trigger events inside the frontier territories of Paksistan, which are becoming nerve centers for the wider conflict in Central Asia.

Wednesday, October 7, 2009

Give Me Your Tired (Old Ideas)

The New York Times had a great article about the Simmons bankruptcy. It took me back to 1986, when I was working as a sell-side research analyst, and I read about the $600 million LBO of Ohio Mattress. Ohio Mattress was itself a roll-up of lots of small mattress makers, and the company eventually became Sealy. As I heard our analyst recount the numbers, it seemed unbelievable to me that so much debt could be piled on a business that put padding on coiled springs and covered them with fabric.

Fast forward to 2009, and we read about the bankruptcy of Simmons. T.H. Lee & Partners makes a cool $90 million on their investment, but, for the record, is "disappointed." Banks have made fees and padded their earnings. Bondholders are out $575 million; "apoplectic" should appear in their press releases. Finally, the employees who dutifully went through all the changes that generated the higher cash flows required to pay off THL were rewarded with cake at their holiday parties and now have nothing. Warren Buffett, who has no aversion to making money, has railed at the private equity paradigm in his shareholder letters for years. This kind of "looting" (a term used in an academic article from 1994) is now called "financial innovation."

Ares Capital Management, the new owners, will benefit from wiping out creditors and bondholders and the cycle starts again. The bondholders, though, have only themselves to blame, as they were apparently told that the use of proceeds for the various debt issues were to pay special dividends to the owners and not to bolster the long-term earnings power and sustainability of the enterprise. Which of our compassionate political parties speaks for the employees?